ABOUT FUEL

Bunker fuels derive their name from the coal bunkers that were ubiquitous on ships until heavy fuel oil took over as the main source of power. These bottom-of-the-barrel residues from the crude oil refinement process have provided the shipping industry cheap energy since the 1950s, but new sulphur regulations mean universal use of HFO is also poised to pass into maritime history.

On Jan. 1 2015, regulations came into effect within Emission Control Areas (ECA) in northern Europe and along the North American coastline that reduce the allowable sulphur content in shipping fuel from 1% to 0.1%. A review due by 2018 will see the maximum sulphur content allowed outside the ECA lowered from the current 3.5% to 0.5% in 2020 or 2025.

The challenges these new low sulphur rules pose to the shipping markets was the topic of discussion throughout the entire shipping transportation and logistics industries. The scope of the changes, which apply to both new and existing vessels, has the energy-dependent shipping industry grappling with growing uncertainty and rising costs. Shipping is no stranger to new regulations, but this is crossing into uncharted territory in terms of overall impact.

While HFO typically contains 2-3% sulphur, it has been possible to meet the 1% ECA limit introduced in 2010 by selecting the lowest sulphur residuals available, or blending with distillates or other less valuable refinery streams. Meeting demand for 0.1% sulphur fuels for ECA consumption, or the proposed 0.5% global cap, will be impossible with residual fuels.

The natural evolution is a switch to lower sulphur distillates, such as the marine gas oil (MGO) used mostly for auxiliary engines to date. With global demand driven by separate 2010 EU regulation, low sulphur MGO is readily available and over 80% of MGO tested globally in 2014 would meet ECA limits. Shipping must compete with the automotive sector, agriculture and heating oil consumers for distillate fuels. ECAs rules could add 50 million metric tons to global distillate demand this year, and the proposed global cap could add a further 250 million metric tons-and at short notice.

The main question is the ability of global refiners to meet demand, however the general consensus is that they need more time to plan and execute any increases in distillate output.

MGO can have a limited shelf life and contains paraffinic wax, which can solidify irreversibly in the fuel tank, potentially making fuel from some areas unsuitable for operation in cold climates. Switching between high viscosity HFO (which needs to be heated before the engine) and low viscosity MGO (which must be kept cooler) also brings the risk of thermal shock, leakage and adverse chemical reactions.

California made a switch to distillates mandatory off their coast in 2009, and this lead to a drastic increase in loss of propulsion incidents linked to fuel switching. Imagine the risk if a ship were drifting without power in a very busy shipping area like the English Channel.

Fuel prices have fallen significantly this year, but that has only partially mitigated the cost impact of the new regulations. In percentage terms, the potential ECA premium has risen. In 2014, 1% sulphur fuel only commanded a small premium over regular, high sulphur fuel. The differential to 0.1% sulphur fuel is much wider. In Jan. 2015 ECA-compliant MGO commanded a 92% premium over the most commonly used residual fuel, IFO380, in Rotterdam.

On a per ship basis, that price gap can equate to anything from $5,000 to over $40,000 of additional costs per day in a business where fuel represents around half of the cost base. “There may be industries that enjoy the kind of margins where they can absorb an increase in costs of that kind, shipping is not one of them. The commercial consequence of this environmental regulation is that those costs will almost certainly be passed through, a first for the industry.

The cost of non-compliance may also be rising. ECA enforcement has been relatively weak to date, but new EU regulation will introduce mandatory fuel testing from 2016. In the past, only about one in 1,000 ships visiting ports inside ECAs were subjected to fuel sulphur checks. This will require EU member states inside ECAs to check the sulphur content in fuels on 40 out of every 1,000. It’s a huge change.

Beyond the ECA, questions remain about how any global cap will be enforced in international waters, and by whom. The worry is that if the regulatory cost is high and enforcement is weak, which is clearly the case with sulphur regulation on the high seas, a temptation not to comply exists. The Trident Alliance, a newly formed industry group, is pressuring official bodies to address the weaknesses in sulphur regulation enforcement and ensure that responsible operators are not at a competitive disadvantage.

Switching to MGO is not the only path to ECA compliance, many alternative fuels and technologies are available, but most are still in development or have yet to be proven viable over the longer term. Rather than using low sulphur fuels, exhaust gas cleaning systems, or scrubbers, can be installed to remove sulphur from the ship’s emissions, but fitting them to existing ships can be problematic, and owners have no guarantees scrubbers will be permitted under future regulation.

Among alternative fuels, LNG offers some promise. “It certainly addresses the sulphur question once and for all, but there are pretty big problems with retrofitting vessels. It’s not a drop-in solution. Rolling out global, supply side infrastructure also presents a significant challenge.

Several alternative ECA-compliant fuels have been developed which have a lower cost base than MGO. These fuels have several technical and operational advantages over MGO, but many carry a higher risk of incompatibility with other fuel grades, meaning they can form unstable blends. “It’s critical for a fleet manager to know where these fuels are available and in what quantities? They cannot risk allocating fuel tanks to products they cannot readily get where and when they need it.

More than 20 new fuel blends have cropped up to meet the ECA sulphur limit, and more could follow as the 2020 global cap approaches. This innovation will provide shipping with cheaper options than pure distillates fuels, which could become a lot more expensive as demand from shipping explodes. But it could create a very complex operating picture and we’re also likely to see variable quality – perhaps even more than we do with the new ECA fuels today.

Thor Marine is active and involved in the charities NSPCC UK, the care and protection of children which also involves enabling them to learn the values, knowledge and skills that enable children to relate to others effectively and to contribute in positive ways to family, school and the community. This reflects in the job that we strive to achieve by contributing to the welfare of children who are the future for us all.

Thor Marine is also active in the charities: RNLI, FONDATION PRINCE ALBERT MONACO actively giving back to the maritime industry by helping to save lives at sea and the rescue and welfare and prevention of cruelty of all animals including maritime species.

Thor Marine Trading believes strongly that we all have a duty to help wherever we can in whatever capacity we can and giving back to the Maritime Industry, children and animals / mammals of all kinds is a concept that helps us strive to become stronger and better at what we do therefore giving us the ability to help others along the way.